Fcnr(B) Loans: A New Appeal

Banks are close to exhausting their lending limits under the foreign currency non resident (FCNR - B) loan scheme following heavy offtake from corporates.

In the credit policy for the second half of 1996-97 announced by the Reserve Bank of India (RBI), the central bank issued guidelines permitting banks to provide foreign-currency denominated loans out of their FCNR(B) deposits.

These loans could be given to borrowers to meet both their rupee and their foreign currency requirements. The scheme met with a rather lukewarm response initially, before it started taking off early this year.

State Bank of India, which has the highest FCNR (B) deposits among Indian banks, had, till July 30 of this year, disbursed about $ 604 million out of a lendable limit of $ 1 billion.

This limit is normally decided by each bank by taking into consideration the un-run maturity for the existing deposits and preparing a balance maturity profile of the deposits and taking into consideration the RBI stipulations (RBI stipulates that no bank should under normal circumstances create an asset liability mismatch). Banks also make allowances for premature withdrawals, etc.

For example, in the case of SBI, the chairman M S Verma had said at the banks annual general meeting that the limit would be $ 1 billion out of its corpus of $ 1.9 billion.

Add to that the approvals made so far, estimated at $ 200 - $ 250 million, and the limit of $ 1 billion is likely to be touched soon. The bank has recently sanctioned a $ 100 million FCNR (B) loan to Indian Oil Corporation. In July alone, SBI disbursed $ 166.97 million in this category.

Most FCNR(B) loans have been for maturities of 12 - 18 months and spread across a wide spectrum of corporates. In fact, banks today are engaged in an interest rate war to attract large corporates by undercutting their rates on FCNR (B) loans.

Leading corporates like Indian Oil Corporation, Hindustan Petroleum, Bharat Petroleum, L&T, Essar, ACC etc. have opted for FCNR(B) loans to meet their working capital requirements.

While the maximum spread is about 200 basis points above Libor, the banks have been reducing this to about 100 basis points for AAA corporates and to about 75 basis points for the oil majors. The prevailing rate for deposits of six months to less than a year is about 4.5 per cent while that for more than a year is 5.5 per cent.

When the scheme was announced initially, there was a lot of apprehension in the corporate sector for two main reasons. First, it came against the background of a past history of rapid devaluation of the rupee.

The second was because these loans were being equated with external commercial borrowings which were available at cheaper rates.

The FCNR bandwagon

The corporate sector has finally got over its initial hesitation and there is a sudden rush for these loans. TISCO, for instance, has a loan of $ 30 million on its books. Says a senior finance official of a Tata group company: There are many reasons why these loans are taking off.

One is that forex premia has been low during the last two months. Two, corporates have now started comparing these loans with the normal rupee working capital loans.

The total for fully-hedged FCNR (B) loans in rupee terms works out to around 13 per cent which is cheaper than any rupee loan available today.

The premia is calculated on an annualised basis (which means that a premia of 4 per cent is effectively 2 per cent for a six month period).

Some corporates even speculate on the premia by hedging only for a part of the period; say, two out of six months, taking the cover at a time when the the rupee is the strongest.

In such a case, the premium cost is reduced even further (say for a premium of 4 per cent it comes to 0.67 per cent for two months).

The other significant reason is that working capital finance was being segregated into a demand loan (which is repayable over a six-month period) and cash credit which is currently distributed in a ratio of 80 : 20.

Says A R De, assistant general manager, project appraisal, Bank of India: For a corporate it does not matter if the demand loan is in the form of rupees or dollars.

The choice automatically goes to that option that offers minimum cost.

No wonder then that the corporates are demanding that their demand loan be converted to dollar-denominated loans. Says R Balasubramanian, assistant general manager, Tisco, Though other alternatives like commercial paper (CP) do exist, subscription to CPs eats into the overall limits that a corporate has with a bank. There are other formalities like rating, etc, that have to be complied with. Tisco, for instance has already used upto 87 per cent of its stipulated commercial paper limit. Also, adds a senior finance official of Telco, Corporates prefer to have a mix of instruments to structure their exposures.

Other banks active in lending FCNR (B) funds are also said to be nearing their limits. Bank of Baroda has lent about $ 250 million and recently finalised sanction of a $ 100 million FCNR(B) term loan (three year tenure repayable in half yearly instalments) to Air India at Libor plus 100 basis points. Canara Bank has lent about $ 200 million in the FCNR (B) quota and Bank of India also around the same figure till a month ago.

The increased demand from corporates for the cheaper loan has also helped trigger off an inter bank market for FCNR (B) funds from smaller banks that do not have the expertise to lend forex-denominated loans directly to corporates. Corporation Bank was lending its funds at 50 basis points above Libor to other banks which in turn was on lent by the bigger banks at 100 - 200 basis points above Libor. Recently, even Corporation Bank has started lending directly to corporates at rates ranging from 98 to 150 basis points over Libor. It has even started accepting deposits upto 3 years maturity which enables them to enter the term lending dollar market.

In fact, corporates are not the only ones to utilise this facility. Most non banking finance companies (NBFCs) are swapping their high cost rupee borrowings to low cost FCNR (B) backed loans.

The NBFC strategy is to convert their cash credit facility from rupees into dollars and reduce their borrowing costs from 15 - 17 per cent currently to about 12 - 13 per cent.

The lead has been taken by Kotak Mahindra Finance (KMFL) which has converted Rs 30 crore of its total cash credit limit of Rs 325 crore to a dollar liability at 12 per cent inclusive of the hedging cost.

Apple Finance has applied to various banks for replacing its existing cash credit of Rs 260 crore from rupees to dollars. The approximate fully hedged cost for the company would be around 13 per cent against the present 16.5 to 17 per cent.

The other NBFCs that have approached banks to convert part of their cash credit limit into dollars are Alpic Finance, 20th Century Finance Corporation, Anagram Finance, Gujarat Lease Finance Corporation, etc.Banks have been converting the erstwhile bulk of the FCNR (A) deposits to FCNR (B) as and when they come up for redemption. Under the FCNR (A) scheme the banks used to surrender the dollar deposits to the RBI and get an equivalent amount of rupees at the prevailing exchange rate.

The transaction would be reversed at the time of redemption, which effectively meant that the exchange risk was borne by the RBI. Under the FCNR (B) scheme, the exchange risk is on the bank itself. Even the NRIs (who currently have FCNR(A) accounts) prefer the FCNR (B) route as opposed to taking the money out on maturity since they are still getting better dollar returns than most other presently available short term investment avenues.